Pranay Vakil and Parimal Shroff, two highly experienced professionals spoke on the new Real Estate (Regulation and Development) Bill, recently cleared by the Union cabinet, and how it would affect homebuyers and the industry
The real estate sector is a critical driver of economic growth and one of the messiest in India. It is smothered in red tape, and as we all know, every politician has resisted creating a real-estate regulator for the past two decades.
Over the decade or so, in tune with rising prosperity, real estate demand has been booming. However, this largest asset item has remained unregulated. This has led to soaring property prices and savers have been repeatedly short-changed by many unethical builders.
Last week the Cabinet cleared the Real Estate (Regulation and Development) Bill that seeks to provide a uniform regulatory environment to the sector.
The bill also intends to make it mandatory for developers to launch projects only after acquiring all statutory clearances from relevant authorities. Builders and developers who become repeat offenders may even face a jail term of up to three years.
Builders routinely get away with nearly anything, even flouting safety standards and norms. Developers don’t need any qualifications or satisfy any requirements to enter the business. Moreover, contracts between buyers and sellers lean heavily towards the sellers. Sometimes, the buyer will need to fork over more money than what he had bargained for because he is in complete grip of the builders. This dampens demand and sales. Since there is no regulator to frame rules, there is no yardstick for minimum standards either. The deep and corrupt nexus between politicians, officials and builders keeps price levels high which keeps real estate out of reach for many middle class households.
Pranay Vakil, one of the most respected names in the real estate industry and former chairman of Knight Frank India, in his presentation spoke on what the bill plans to accomplish, what it does not cover and the legal issues. What the bill has missed out is properties and developments other than housing or residential property viz. commercial, office developments and malls. Also there is no regulation in place to deal with the menace of unaccounted money. There is also a conflict between state and central laws. It would also have been useful if the bill could have put in place a mechanism to provide rating to developments, said Mr Vakil.
Parimal Shroff, with over 37 years’ experience in constitutional, corporate, civil and property law, pointed out that the Central Act is “too ambitious”. “It proposes that all permissions, information, online declarations and registration are to be validated before the project starts. The penalties for failing to comply are too severe. Then, it requires that the plans and designs to be put up online—this gives rise to problems related to protection of intellectual property and security,” said Mr Shroff.
The bill seeks to provide transparency in real estate developments. Registration of existing and new developments will require disclosure of layout, carpet area, etc. The sales agreement format is planned to be standardised. This would lead to more balanced agreements as currently the agreements are skewed in favour of the developers, said Mr Vakil.
The bill also seeks to provide protection of consumer interests wherein the developers would compensate buyers for delays, cancellation of registration and failure to hand over possession on due date. Real estate agents would also have to be registered. There would be strict control on the utilisation of funds where 70% of the collection is to be used only for the project. There will be a focussed dispute resolution mechanism as well. Dispute resolution by the authority which will have powers similar to civil court will lead to reduction in delays.
Mr Shroff, however, pointed out the effect of rules and regulations pertaining to real estate have always been subject to legal interpretations. He said, “Regulators become pro-active with passage of time. You cannot really say how the laws will affect you until it is interpreted by the court. Subject to interpretations, amendments will also be made.”
Read more about the Real Estate Regulation Bill:
The scheme would actively use derivative strategies with a view to outperform the market. Use of derivatives would bring about higher risk to the portfolio and could lead to losses for the investor if the fund manager is not cautious
Pramerica Mutual Fund plans to launch a new scheme— Pramerica Alpha Equity Fund, according to an offer document filed with the Securities and Exchange Board of India (SEBI). The scheme would seek to provide “capital appreciation and income distribution to the investors by using equity investments in the spot market and equity derivatives strategies.” The scheme would invest 65%-100% of its assets in equity and equity derivative instruments. The remaining part of the portfolio would be invested in debt and money market instruments. Using derivatives brings in additional risk to ones portfolio, however, this seems to be fad now as earlier Axis MF filed an offer document for its scheme—Axis Dynamic Balanced Fund, which would use derivative instruments to hedge its portfolio (Read: Axis Dynamic Balanced Fund: Using hedging strategies could be risky).
What strategy will the fund manager use to generate ‘alpha’ returns? According to the offer document, “By taking long positions in potential gainers and short positions in stocks which have the highest probability of losing value, the strategy enhances its ability to profit from future movements. In addition, the ability to short the market using index derivatives allows the strategy to insulate a portfolio from downside risk at times of elevated market volatility.”
Fund managers seek to generate alpha (superior returns compared to the benchmark) by using their stock selection and market timing skills. Our analysis in the past has shown that most of these schemes invest in benchmark stocks. (Read: Piggybacking the Sensex and Nifty) However, despite picking the index stocks, what makes a big difference in performance is the weightage and timing and a combination of these two. And just a few fund houses have succeeded in doing this. Pramerica MF plans to use derivatives instruments to enhance its efforts to provide superior returns. But investors should beware, because use of derivatives increases the risk of the portfolio and could lead to huge losses if the fund manager makes a wrong call.
In terms of fund management, Pramerica MF has a track record of less than three years. It has just one diversified equity scheme—Pramerica Equity Fund—which was launched in December 2010. The scheme has delivered a return of 15% over the past one year (as on 11 June 2013). Its benchmark, CNX Nifty, delivered a return of 14.54% over the same period. It’s dynamic scheme—Pramerica Dynamic Fund—which was launched at the same time has delivered a return of 12.37%
Brahmaprakash Singh, will manage the equity portion of the new scheme. He has an experience of 18 years in the fund industry. Mahendra Jajoo, who has 20 years of experience will manage the debt portion.
Other details of the scheme
Benchmark: CNX Nifty Index
Initial Purchase: Minimum of Rs5,000 and in multiples of Re1 thereafter.
Additional Purchase: Minimum of Rs500 and in multiples of Re1 thereafter.
Expense Ratio: Maximum total expense ratio permissible under Regulation 52(6)(c)(i): Up to 2.50%
Additional expenses under regulation 52(6A)(c): Up to 0.20%
Additional expenses for gross new inflows from specified cities: Up to 0.30%
If units are redeemed/switched out after 30 days, but on or before 395 days from the date of allotment - 1%
“The revision of the outlook to Stable reflects the measures taken by the government to contain the budget deficit, including the commitments made in the FY’14 budget,” Fitch said in a statement
Bringing cheer to the government struggling to arrest rupee’s slide, global ratings agency Fitch on Wednesday revised India's sovereign credit outlook to stable from negative. Taking note of the government’s efforts to contain fiscal deficit, Fitch Ratings revised India’s outlook to Stable from Negative and affirmed ‘BBB-’ rating.
“The revision of the outlook to Stable reflects the measures taken by the government to contain the budget deficit, including the commitments made in the FY’14 budget, as well as some, albeit limited, progress in addressing some of the structural impediments to investment and economic growth,” the agency said in a statement. Fitch further said it expects the economy to recover after real GDP grew just 5% in 2012-13 versus 6.2% in the year-ago period.
India’s economic recovery, however, is likely to remain slow until a healthier investment climate is created, which helps lift potential growth again, it said. “As a result, Fitch is forecasting only a modest recovery with real GDP expected to expand 5.7% and 6.5% in FY14 and FY15, respectively,” Fitch said.
Fitch along with Standard and Poor’s had earlier threatened to downgrade India’s rating to junk grade in absence of steps by government to contain deficits and promote investment. The rupee on Tuesday touched historic low of 58.96 against the dollar.
However, it recovered by 19 paise to 58.20 against the dollar in early trade today after the Reserve Bank of India (RBI) announced steps to check the free-fall in rupee, raising the limit for online repatriation of export proceeds by over three-fold to $10,000. A concerned government has given indications to investors that it would take more steps to increase foreign investments in the country to stabilise rupee.
Fitch also affirmed its Long-Term Foreign-and Local-Currency Issuer Default Ratings (IDRs) at ‘BBB-’. “The agency has also affirmed the Country Ceiling at ‘BBB-’ and the Short-Term Foreign-Currency IDR at ‘F3’," it said.
It said the outlook revision and the affirmation of India’s investment-grade ratings reflect that the authorities were successful in containing the upward pressure on the central government’s budget deficit in the face of a weaker-than-expected economy. The fiscal deficit was 4.9% of GDP in 2012-13, compared with 5.7% in the previous year.
“The authorities have also begun to address structural factors that have weakened the investment climate and growth prospects, notably regulatory uncertainty, delays in government approvals of investment projects and supply bottlenecks, for example, in the power and mining sectors,” it said. The establishment of a Cabinet Committee on Investment should help to fast-track infrastructure-related projects and the government has made it easier for FDI to access a range of industries.
“Nonetheless, the investment climate could benefit from further reforms, such as the new land acquisition bill, some liberalisation of insurance and pension provision and public procurement, which are pending parliamentary approval,” Fitch said. It said addressing the structural issues in the power and mining sectors would further boost investor confidence.
Referring to inflation, Fitch said the pressures have begun to show more pronounced signs of easing in response to weaker economic conditions and the tightening of monetary conditions by the RBI. “The recent weakness of the exchange rate may, however, complicate policy management and limit the scope for further cuts in RBI policy rates,” it added.